Information acquisition and processing skills of institutions and retail investors around information shocks

• Published in: Journal of empirical finance 2024-06, Vol.77, p.101495, Article 101495
• Main Authors: Fung, Scott, Obaid, Khaled, Tsai, Shih-Chuan
• Format: Article
• Language: English
• Subjects: Information shocks; Investor heterogeneity; Price jumps; Trade imbalance
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2024.101495

•We compare the trading skills of institutions and individuals around jumps.•Institutions possess information advantages over individuals.•Domestic institutions generate higher trading profits than foreign institutions.•Foreign institutions’ advantages are consistent across different sources of jumps.•Individuals’ information disadvantages are lessened during prescheduled events and news. Using audit trail data from the Taiwan Stock Exchange, this paper compares the trading skill of institutions and individuals around information shocks. We find suggestive evidence that institutions possess information acquisition and processing advantages over individuals. Specifically, net buying done by institutions (individuals) prior to and during jumps positively (negatively) predicts future intraday returns. This predictive relation is strongest among stocks with high limits to arbitrage and a limited information environment. Moreover, domestic institutions generate higher trading profits than foreign institutions. Unlike domestic institutions, the information acquisition and processing advantages of foreign institutions prevail across different sources of price jumps, such as prescheduled events and macroeconomic news. Prescheduled events and news lessen the information disadvantages for individuals.